The end of abundance? In a letter to shareholders, published on the occasion of the half-year results, the CEO and co-founder of Klarna, Sebastian Siemiatkowski does not hide that the deferred payment market (buy now, pay later) is going through a serious crisis. “Klarna evolved in the first half of the year in a radically different environment (compared to autumn 2021, editor’s note)”he wrote. “We are witnessing a tragic and unnecessary war in Ukraine, a huge change in investor perception, a sharp rise in inflation, a very volatile stock market and a probable recession”thus enumerates the leader.
The half-year figures of the Swedish group illustrate the difficulties of the sector. While activity remains buoyant, with revenue up 24% to $950 million – and this for a transaction volume of $41 billion (+21%), losses were however multiplied by four at $581 million.
Rising costs
These losses are explained, according to the company, by a sharp increase in costs, linked to the integration of the PriceRunner price comparison platform, but also by the increase in credit losses. Personnel costs also played a role, as the 10% workforce reduction plan has not yet produced its effects in the first half. The group had already announced a series of measures to reduce its costs and aim for profitability. As Sebastian Siemiatkowsk points out, the time for growth is over, make way for profitability. This is a very clear demand from investors.
The latter agreed, after several failed attempts, to complete a new funding round last July of 800 million dollars for a “post money” valuation of 6.7 billion dollars. Or an evaluation divided by 7 compared to the 45.6 billion dollars reached during a previous round of funding in June 2021.
The co-founder recalled in July that the new valuation base remained three times higher than in 2018 and that the valuations of comparable groups, such as Affirm in the United States, had also fallen by 80 to 90% compared to their peaks.
Live model
Beyond these figures, it is the model itself that is tested in these periods of consumption that are much less prosperous. The increase in provisions shows the difficulty of recruiting new customers with good risk profiles, while low margins cannot cover a sudden increase in the cost of risk. Risk analysis remains the sinews of war, which the banks (and their specialized subsidiaries) intend to take advantage of to regain some of the ground lost in this segment of the credit market. Apple’s entry into this market is also a serious threat.
Especially since these installment payment facilities, which are very popular with young people and e-commerce enthusiasts, are subject to increased surveillance by regulators, especially in times of high inflation and deteriorating economic conditions. .
The British regulator Financial Conduct Authority has also this summer warned the companies of “buy now, pay later” (“buy now, pay later”) against misleading advertisements and hidden fees. Klarna had already had problems with the advertising control agency last December on the grounds that the Swedish company encouraged “irresponsible” use of credit. Since then, the company has changed its communication policy, particularly on social networks, and has developed budget management tools.
In the meantime, Klarna has undoubtedly tightened the screw in the acceptance of payment files in several stages. The group insists above all on its strategic shift which intends to go beyond the borders of deferred payment to establish itself as an e-commerce portal. Not sure that his merchant partners are following him in this direction.